This means that with the feature turned on, when you type ":-/", it will automatically convert into an emoji. Unfortunately, this doesn't mean that when you type in beer, it will convert into the appropriate emoticon though.
The text-to-emoji feature can be toggled on or off in the settings, and if you decide to disable it, you can still use the emoji picker by tapping the icon in a conversation.
The feature has rolled out to Hangouts on the web, and should also be rolling out to the Chrome extension pretty soon.
Source: +Sage LaTorra - Google+ post